supply chain integration and e- business strategies david simchi-levi professor of engineering...

Supply Chain Integration and e-Business Strategies

David Simchi-Levi

Professor of Engineering SystemsMassachusetts Institute of Technology

Tel: 617-253-6160E-mail: [email protected]

©Copyright 2002 D. Simchi-Levi

Outline

• Review– Supply Chain Dynamics

• A new Supply Chain Paradigm• Matching Products with Strategies• e-Business Opportunities


The Dynamics of the Supply Chain

Ord

er

Siz

e

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

CustomerDemand

CustomerDemand

Retailer OrdersRetailer OrdersDistributor OrdersDistributor Orders

Production PlanProduction Plan


The Dynamics of the Supply Chain

Ord

er

Siz

e

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

CustomerDemand

CustomerDemand

Production PlanProduction Plan


What are the Causes….

• Promotional sales• Volume and Transportation discounts

– Batching

• Inflated orders• Demand Forecast• Long cycle times• Lack of Visibility to demand

information


Consequences….

• Increased safety stock

• Reduced service level

• Inefficient allocation of resources

• Increased transportation costs


The Bullwhip Effect:Managerial Insights

• Exists, in part, due to the retailer’s need to estimate the mean and variance of demand.

• The increase in variability is an increasing function of the lead time.

• The more complicated the demand models and the forecasting techniques, the greater the increase.

• Centralized demand information can reduce the bullwhip effect, but will not eliminate it.


Coping with the Bullwhip Effect in Leading Companies

• Reduce Variability and Uncertainty- POS- Sharing Information- Year-round low pricing

• Reduce Lead Times- EDI- Cross Docking

• Alliance Arrangements– Vendor managed inventory– On-site vendor representatives


Example: Quick Response at Benetton

• Benetton, the Italian sportswear manufacturer, was founded in 1964. In 1975 Benetton had 200 stores across Italy.

• Ten years later, the company expanded to the U.S., Japan and Eastern Europe. Sales in 1991 reached 2 trillion.

• Many attribute Benetton’s success to successful use of communication and information technologies.


Example:Quick Response at Benetton

• Benetton uses an effective strategy, referred to as Quick Response, in which manufacturing, warehousing, sales and retailers are linked together. In this strategy a Benetton retailer reorders a product through a direct link with Benetton’s mainframe computer in Italy.

• Using this strategy, Benetton is capable of shipping a new order in only four weeks, several week earlier than most of its competitors.


How Does BenettonCope with the Bullwhip Effect?1. Integrated Information Systems

• Global EDI network that links agents with production

and inventory information• EDI order transmission to HQ• EDI linkage with air carriers• Data linked to manufacturing

2. Coordinated Planning• Frequent review allows fast reaction• Integrated distribution strategy


Distribution Strategies

• Warehousing• Direct Shipping

– No DC needed– Lead times reduced– “smaller trucks”– no risk pooling effects

• Cross-Docking


Cross Docking

In 1979, Kmart was the king of the retail industry with 1891 stores and average revenues per store of $7.25 million

• At that time Wal-Mart was a small niche retailer in the South with only 229 stores and average revenues about half of those Kmart stores.

• Ten years later, Wal-Mart transformed itself; it has the highest sales per square foot, inventory turnover and operating profit of any discount retailer. Today Wal-Mart is the largest and highest profit retailer in the world.


What accounts for Wal-Mart’s remarkable success

• The starting point was a relentless focus on satisfying customer needs; Wal-Mart goal was simply to provide customers access to goods when and where they want them and to develop cost structures that enable competitive pricing

• The key to achieving this goal was to make the way the company replenished inventory the centerpiece of its strategy.


What accounts for Wal-Mart’s remarkable success?

• This was obtained by using a logistics technique known as cross-docking. Here goods are continuously delivered to Wal-Mart’s warehouses where they are dispatched to stores without ever sitting in inventory.

• This strategy reduced Wal-Mart’s cost of sales significantly and made it possible to offer everyday low prices to their customers.


Characteristics of Cross-Docking:

• Goods spend at most 48 hours in the warehouse,

• Avoids inventory and handling costs,• Wal-Mart delivers about 85% of its

goods through its warehouse system, compared to about 50% for Kmart,

• Stores trigger orders for products.


System Characteristics:

• Very difficult to manage,• Requires linking Wal-Mart’s distribution

centers, suppliers and stores to guarantee that any order is processed and executed in a matter of hours,

• Wal-Mart operates a private satellite-communications system that sends point-of-sale data to all its vendors allowing them to have a clear vision of sales at the stores


System Characteristics:

• Need a fast and responsive transportation system:

• Wal-Mart has a dedicated fleet of 2000 trucks that serve their 19 warehouses

• This allows them to – ship goods from warehouses to stores

in less than 48 hours– replenish stores twice a week on

average.


Distribution Strategies

StrategyAttribute

DirectShipment

CrossDocking

Inventory atWarehouses

RiskPooling

TakeAdvantage

TransportationCosts

ReducedInbound Costs

ReducedInbound Costs

HoldingCosts

No WarehouseCosts

No HoldingCosts

DemandVariability

DelayedAllocation

DelayedAllocation


Supply Chain Integration - Dealing with Conflicting Goals

• Lot Size vs. Inventory• Inventory vs. Transportation• Lead Time vs. Transportation• Product Variety vs. Inventory• Cost vs. Customer Service


The Future is Not What it Used to Be

– Reduce cost– Increase Profit– Increase service level– Increase flexibility

• A new Business Modele-


Reality is Different…..

• Peapod Example– Founded 1989– 140,000 members, largest on-line grocer– Revenue tripled to $73 million in 1999– 1st Quarter of 2000: $25M Sales, Loss: $8M

• Amazon.com Example– Founded in 1995; 1st Internet purchase for most people– 1996: $16M Sales, $6M Loss– 1999: $1.6B Sales, $720M Loss– 2000: $2.7B Sales, $1.4B Loss– Last quarter of 2001: $50M Profit

• Total debt: $2.2B


Reality is Different….

• Dell Example:– Dell Computer has outperformed the

competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999)


Reality is Different….

• Cisco Example:

– Cisco’s Internet based business model has been instrumental in our ability to quadruple in size from fiscal 1994 to fiscal 1998 ($1.3B to over $8B), hire approximately 1000 new employees per quarter and saving $560M annually in business expenses (Peter Solvik, CIO Cisco)


• e-Business is a collection of business models and processes motivated by Internet technology, and focusing on improving the extended enterprise performance– e-commerce is part of e-Business– Internet technology is the driver of the business

change– The focus is on the extended enterprise:

• Intra-organizational • Business to Consumer (B2C)• Business to Business (B2B)

The Business Modele-


A new Supply Chain Paradigm

• A shift from a Push System...– Production decisions are based on

forecast

• …to a Push-Pull System


From Make-to-Stock Model….ConfigurationAssemblySuppliers


Demand Forecast

• The three principles of all forecasting techniques:

– Forecasts are always wrong– The longer the forecast horizon the worst is

the forecast – Aggregate forecasts are more accurate

• The Risk Pooling Concept




forecast

• …to a Push-Pull System


Push-Pull Supply Chains

Push-Pull Boundary

PUSH STRATEGY PULL STRATEGY

Low Uncertainty High Uncertainty

The Supply Chain Time Line

CustomersSuppliers




forecast

• …to a Push-Pull System– Parts inventory is replenished based

on forecasts– Assembly is based on accurate

customer demand


….to Assemble-to-Order ModelConfigurationAssemblySuppliers


Business models in the Book Industry

• From Push Systems...– Barnes and Noble

• ...To Pull Systems– Amazon.com, 1996-1999

• And, finally to Push-Pull Systems– Amazon.com, 1999-present

• 7 warehouses, 3M sq. ft.,

Direct-to-Consumer:Cost Trade-OffCost Trade-Off for BuyPC.com

$0$2$4$6$8

$10$12$14$16$18$20

0 5 10 15

Number of DC's

Co

st (

$ m

illio

n)

Total Cost

Inventory

Transportation

Fixed Cost


Industry Benchmarks:Number of Distribution Centers

Sources: CLM 1999, Herbert W. Davis & Co; LogicTools

Avg.# ofWH 3 14 25

Pharmaceuticals Food Companies Chemicals

- High margin product- Service not important (or easy to ship express)- Inventory expensiverelative to transportation

- Low margin product- Service very important- Outbound transportationexpensive relative to inbound


Business models in the Grocery Industry

• From Push Systems...– Supermarket supply chain

• ...To Pull Systems– Peapod, 1989-1999

• Stock outs 8% to 10%

• And, finally to Push-Pull Systems– Peapod, 1999-present

• Dedicated warehouses• Stock outs less than 2%


Business models in the Grocery Industry

• Key Challenges for e-grocer:– Transportation cost

• Density of customers

– Very short order cycle times• Less than 12 hours

– Difficult to compete on cost• Must provide some added value such as convenience


Less than 300,000 shoppers

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PPeeaappoodd 114400000000 $$112200 $$77..9955 ppeerr oorrddeerr

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SShhooppLLiinnkk..ccoomm 33330000 $$9988 $$2255 mmoonntthhllyy

SSttrreeaammlliinnee..ccoomm 33440000 $$110000 $$3300

Source: D. Ratliff


A New Type of Home Grocer

• grocerystreet.com– On-line window for retailers– The on-line grocer picks products at

the store– Customer can pick products at the

store or pay for delivery


e-Business in the Retail Industry

• Brick-&-Mortar companies establish Virtual retail stores– Wal-Mart, K-Mart, Barnes and Noble

• Use a hybrid approach in stocking – High volume/fast moving products for local

storage– Low volume/slow moving products for

browsing and purchase on line

• Channel Conflict Issues


E-Fulfillment Requires a New Logistics Infrastructure

Traditional Supply Chain e-Supply Chain

Supply Chain Strategy Push Push-Pull

Shipment Type Bulk Parcel

Inventory Flow Unidirectional Bi-directional

Reverse Logistics Simple Highly Complex

Destination Small Number of Stores Highly Dispersed Customers

Lead Times Depends Short


Wal-Mart’s e-fulfillment Strategy • Wal-Mart has always prided itself in its in-house

distribution operations. • Thus, it was a huge surprise when the company

announced that it plans to hire an outside firm to handle order fulfillment and warehousing for it’s on-line store Wal-Mart.com, which the retailer launched in the fall of 1999.

• Filling orders behind the scenes of Wal-Mart’s cyberstore is Fingerhut Business Services. Fingerhut will provide Internet order fulfillment, warehousing, shipment, payment processing, customer service and merchandise returns.


E-Fulfillment

• Is it a new concept?• What is the difference between

on-line and catalogue selling?• Consider for instance Land’s End

which has both channels


Matching Supply Chain Strategies with Products

Pull Push

Pull

Push

I

Computer

II

IV III

Demand uncertainty

(C.V.)

Delivery costUnit price

L H

H

L

Economies of Scale


Locating the Push-Pull Boundary


Organizational Skills Needed

RawMaterial Customers

PullPush

Low Uncertainty

Long Lead Times

Cost Minimization

Resource Allocation

High Uncertainty

Short Cycle Times

Service Level

Responsiveness


e-Business Opportunities:

• Reduce Facility Costs– Eliminate retail/distributor sites

• Reduce Inventory Costs– Apply the risk-pooling concept

• Centralized stocking• Postponement of product differentiation

• Use Dynamic Pricing Strategies to Improve Supply Chain Performance


e-Business Opportunities:

• Supply Chain Visibility– Reduction in the Bullwhip Effect

• Reduction in Inventory• Improved service level• Better utilization of Resources

– Improve supply chain performance• Provide key performance measures• Identify and alert when violations occur• Allow planning based on global supply chain data

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